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Strong fundamentals for European utilities offset by political risk and rising rates

The recent evolution of commodity and power prices could help generators and integrated utilities reverse the trend in 2022. However, the upside risk on earnings could be taken away by government intervention to mitigate the impact on consumer bills. Further, rising interest rates remain a possible headwind for the sector and regulated names in particular.

Driven by rising commodities, 1-year forward curves in Germany, Italy, and Spain are up over the past 12 months. While hedging policies are limiting the earnings upside in 2021-22, the positive impact can materialize from 2023.

Extra profits have already been targeted (unsuccessfully) in Spain, while Italy is currently considering new measures. Italy, France, and (soon) the UK are intervening on regulated tariffs. We also assess risk in Germany and Portugal, with the latter benefitting from higher renewables penetration.

The goals to add 400GW by 2030 at the European level remain in place. However, the risk of lower near-term capex in the US persists. Production Tax Credit (PTC) extensions could be a significant catalyst, adding return for onshore wind – as envisaged by Build Back Better. Scale and diversification (both by technology and geography) do matter, as we have found out since the COVID-19 outbreak, with the largest developers able to deliver on targets despite supply chain bottlenecks and cost inflation. However, valuations became less demanding in the last 12 months by pricing in less than 10 years of growth for renewables.

@Stefano Bezzato